In the world of tax policy, 2013 is ending a lot tamer than last year. Who can forget last year at this time as the country careened Thelma and Louise-style toward the fiscal cliff in which all of the Bush-era tax laws were about to expire at the stroke of midnight. Going over the cliff would have terminated about half the tax code all at once.
This year is more modest, but interesting in its own way. At midnight tonight, 55 tax breaks—known on Capitol Hill as “extenders” because they must be renewed each year—will expire. These 55 tax provisions are a grab bag of both important and frivolous items benefiting individuals and businesses .
While many eyes will be on the extenders, we should not forget that we will welcome in a new wave of Obamacare tax hikes on January 1st.
Here’s a quick review of what’s out and what’s in.
There are a couple of expiring provisions that many individual taxpayers will care about:The tax subsidy for riding mass transit will fall from about $245 a month to $130. The tax subsidy for parking will remain at $250. The deduction for qualified tuition and related expenses will expire. The ability to donate money from your IRA tax-free will expire. This has been very popular with retirees. The amount that banks write off in mortgage loan forgiveness for people whose houses are under water has been tax exempt, but will once again be counted as income for tax purposes.
Many businesses will care about these expiring items:The tax credit for research and development (R&D). Small businesses will see a reduction in the amount of equipment purchases they can expense (so-called 179 expensing). Big businesses will lose the 50% bonus expensing for capital investments. Multinational businesses will lose two key provisions: “Active financing,” which is the equivalent of deferral for banks and businesses that finance the foreign sale of their own products (such as tractors); and, “look-through treatment,” which allows companies to move cash between foreign subsidiaries without triggering a U.S. tax liability.
Some tax breaks most of us won’t miss:Special expensing for film and TV productions. 3-year write off for race horses under two years old. Faster depreciation for motor racing tracks. Lots of tax subsidies for renewable energy programs such as biodiesel, electric motorcycles, and energy-efficient appliances.
The new Obamacare taxes include:The “tax” (or fee) for failing to sign up for Obamacare. In 2014 the tax is $95 or 2.5% of your income over a certain threshold. The tax goes up after 2014. (The tax or penalty on businesses was waved for one year). New tax credits, or the subsidy for people who are eligible for assistance with their insurance premiums. A new tax or “fee” on health insurance companies -- $8 billion worth in 2014. This will get directly passed on to consumers.
Here is a full list of the tax extenders along with their costs for 2013 and 2014, as was estimated by the Joint Committee on Taxation after their extension on January 1, 2013. JCT has not released any cost estimates for renewing these provisions for 2014 and beyond.Estimated Revenue Cost
(Billions) Tax Provisions Expiring on 12/31/2013 2013 2014 Individual tax extenders Credit for health insurance costs for eligible individuals1 $0.20 $0.20 Extension of deduction for certain expenses of elementary and secondary school teachers. $0.24 $0.16 Extension of exclusion from gross income of discharge of qualified principal residence indebtedness. $0.20 $1.13 Extension of parity for exclusion from income for employer-provided mass transit and parking benefits. $0.19 $0.03 Extension of mortgage insurance premiums treated as qualified residence interest. $0.79 $0.51 Extension of deduction of State and local general sales taxes. $2.86 $2.40 Extension of special rule for contributions of capital gain real property made for conservation purposes. $0.08 $0.05 Extension of above-the-line deduction for qualified tuition and related expenses. $0.94 $0.76 Extension of tax-free distributions from individual retirement plans for charitable purposes. $0.59 $0.28 Total of Individual Provisions $6.10 $5.53 Business tax extenders Extension of research credit. $6.23 $1.99 Extension of temporary minimum low-income tax credit rate for non-federally subsidized new buildings. * $0.00 Extension of housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds. $0.00 $0.00 Extension of Indian employment tax credit. $0.07 $0.04 Extension of new markets tax credit. $0.01 $0.03 Extension of railroad track maintenance credit. $0.23 $0.10 Extension of mine rescue team training credit. $0.00 $0.00 Extension of employer wage credit for employees who are active duty members of the uniformed services. $0.00 $0.00 Extension of work opportunity tax credit. $0.95 $0.57 Extension of qualified zone academy bonds. $0.00 $0.01 Extension of classification of certain race horses as 3-year property. * * Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. $0.28 $0.37 Extension of 7-year recovery period for motorsports entertainment complexes. $0.05 $0.02 Extension of accelerated depreciation for business property on an Indian reservation. $0.31 $0.27 Extension of bonus depreciation. $34.44 $15.84 Extension of enhanced charitable deduction for contributions of food inventory. $0.22 $0.10 Extension of increased expensing limitations and treatment of certain real property as section 179 property. $8.09 $4.04 Extension of election to expense mine safety equipment. $0.03 $0.00 Extension of special expensing rules for certain film and television productions. $0.27 $0.16 Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. $0.24 $0.12 Extension of modification of tax treatment of certain payments to controlling exempt organizations. $0.04 $0.01 Extension of treatment of certain dividends of regulated investment companies. $0.12 $0.03 Extension of RIC qualified investment entity treatment under FIRPTA. $0.05 $0.01 Extension of subpart F exception for active financing income. $9.40 $1.83 Extension of look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules. $1.20 $0.30 Extension of temporary exclusion of 100 percent of gain on certain small business stock. -$0.01 -$0.01 Extension of basis adjustment to stock of S corporations making charitable contributions of property. $0.09 $0.05 Extension of reduction in S-corporation recognition period for built-in gains tax. $0.18 $0.05 Extension of empowerment zone tax incentives. $0.36 $0.04 Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands. $0.20 $0.02 Extension of American Samoa economic development credit. $0.04 $0.02 Election to accelerate AMT credit in lieu of bonus depreciation $0.16 $0.14 Total of Business Tax Provisions $63.23 $26.17 Energy tax extenders Extension of credit for energy-efficient existing homes. $1.46 $0.99 Extension of credit for alternative fuel vehicle refueling property. $0.03 $0.01 Extension of credit for 2- or 3-wheeled plug-in electric vehicles. $0.00 $0.00 Extension of second generation biofuel producer credit. $1.88 $0.30 Extension of incentives for biodiesel and renewable diesel. * * Extension of production credit for Indian coal facilities placed in service before 2009. $0.00 * Extension of credits with respect to facilities producing energy from certain renewable resources. $0.12 $0.45 Extension of credit for energy-efficient new homes. $0.07 $0.03 Extension of credits for energy-efficient appliances. $0.16 $0.08 Extension of special allowance for second generation biofuel plant property. $0.00 $0.00 Extension of placed in service date for election to expense certain refineries. * $0.10 Extension of energy efficient commercial buildings deduction.1 $0.10 $0.10 Extension of special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities. $0.60 $0.05 Extension of alternative fuels excise tax credits. $0.31 $0.06 Total of Energy Tax Provisions $4.72 $2.16 Total Cost of All Extenders $74.05 $33.86
1. JCT Tax Expenditure Estimates, February 2013
*Under $50 million
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Tomorrow night, millions of Americans will celebrate the New Year with close friends, good food, and champagne. People who otherwise never drink sparkling wine will indulge in the experience—often at their wallet’s expense—in order to wish “farewell” to 2013, and to offer a warm welcome to 2014. For many of us, however, our champagne toasts come with some fine print: an additional tax on our effervescent vinos.
According to data from the Wine Institute, Florida comes in with the highest tax rate at $3.50 per gallon. This is a full dollar more than the second place holder, Alaska, at $2.50 per gallon, which is followed by Hawaii ($2.12/gallon) and Oklahoma ($2.08/gallon). On the other end of the spectrum, Wisconsin has the lowest of all the states with a rate of $0.25 per gallon, and is followed by Wyoming ($0.28/gallon). California, Kansas, and New York are close behind in 3rd place with rates of $0.30 per gallon.
Also note, some states have alternative rates for wines in a specific alcohol content range.
All maps and other graphics may be published and reposted with credit to the Tax Foundation.
(Click on the map to enlarge it. View previous maps here.)
Don’t let the additional taxes on the last moments of 2013 spoil your evening, though. Eat, drink (responsibly), be merry, and have a happy New Year!
As anyone who’s ever bought an airplane ticket home for the holidays knows, taxes and fees on air travel can be substantial. We’ve written before on how much gas taxes and tolls can cost for holiday travel on roads, but taking to the skies is little better.
For my own travel home for Christmas, I paid $48.44 in taxes on a $229.76 ticket: that’s a 21 percent tax rate. But, according to Airlines for America, an airline industry group, federal airline taxes for a ticket totaling $300 average $61.49. That’s 20 percent of the ticket price, or the equivalent of a 26 percent tax.
Airline Taxes, Example Round Trip Ticket from DC to Kentucky
Base Ticket Price
Passenger Ticket Tax
7.5% of base fare
Domestic Flight Segment Tax
$3.90 per flight segment
September 11th Security Fee
$2.50 per enplanement
Passenger Facility Charges
Varies by airport; up to $4.50
Total Taxes and Fees
*$3 for Charlotte airport, $4.50 paid twice for DCA arriving and departing
The list of federal airline taxes is long: 17 different taxes and fees, in fact. Some of these taxes and fees, like the Passenger Facility Charges (PFCs) that airports levy, can be seen as “user fees,” wherein airports bill passengers for the cost of expanding airport facilities and services. On my flight, I paid PFCs in Charlotte, and both going and coming at DCA in Virginia.
The passenger ticket tax, which works like a 7.5 percent sales tax on tickets, and the domestic flight segment tax, which is a $3.90 fee on each leg of a journey, both go to the Airport and Airway Trust Fund, which pays for the Federal Aviation Administration (FAA). These two taxes can also be seen as indirect user fees. The FAA oversees air traffic control, which is essential for air travel. However, the FAA is also a major regulator of the airline industry, which contributes to higher costs: so these aren’t “pure” user fees, any more than taxes that pay for a traffic cop’s salary is a “user fee” for highways.
The September 11th Security Fee (9/11 Fee) I paid, which will double to $5 per enplanement in 2014, is also only dubiously-defined as a user fee. Revenues raised from the 9/11 Fee fund Transportation Security Administration operations, especially security checkpoints at airports. On the one hand, it is true that passengers “use” these security services. On the other hand, probably very few of us wake up in the morning hoping we get to pay $2.50 (let alone $5) to walk through a full-body scanner and then get frisked.
There are even more taxes on international flights, and numerous taxes are applied to airline fuel which are baked into the price of the ticket. Thus, with airline taxes so high and set to go higher, taxes and fees represent a major share of air travel costs. Policymakers would do well to look into the “services” being provided, and decide if they are worth the cost, before they raise airline taxes and fees further.
“Automatic gratuities” added onto the restaurant bills of large parties will be treated as wages and not tips starting January 1, 2014, as a suspended IRS ruling finally takes effect. Many restaurants add these charges to groups of 5 or 6 or 8 or more to prevent their servers from being undertipped when handling large parties.
Under the IRS ruling, Rev. Ruling 2012-18, a sharper distinction is drawn between tips and service charges. Both are taxable but tips are reported and cashed out that day. Under the new rules, to be a tip:
(1) the payment must be made free from compulsion;
(2) the customer must have the unrestricted right to determine the amount;
(3) the payment should not be the subject of negotiation or dictated by employer policy; and
(4) generally, the customer has the right to determine who receives the payment.
Automatic gratuities don’t meet these criteria, so they would be classified as service charges. Employers would have to cycle these charges through their payroll system to distribute to servers, delaying payment by up to two weeks, and factor them into hourly wage rates.
The likely result is that restaurants will discontinue automatic gratuities for large parties, to avoid additional compliance costs and to allow employees to take their tips home on the day they get them. Getting servers to work large parties will probably be harder.
The IRS views this as the latest step in their effort to crack down on underreported tip income although previous enforcement efforts (employee and employer reporting requirements and high-profile investigations) and the shift from cash to credit for most payments has ended this evasion for the most part. To the IRS, it’s just a clarification “in the best interest of tax administration.” But one that will make life a little bit harder for restaurants and their waitstaff.
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‘Tis the night before Christmas, and economists and the stock markets are rejoicing in the gift of an unexpected jump in durable goods orders in November. Some market analysts are declaring it to be a harbinger of a strengthening economy in 2014. One can always hope.
However, before anyone gets too carried away, it would be wise to note that some of these November orders may be due to a pending tax increase. The last extension of “bonus expensing” in the American Taxpayer Relief Act of 2012 – which allows immediate write-off of 50% of the cost of equipment – will expire on December 31. The cost of new equipment will be several percent higher in 2014.
The current surge in orders could be part of a rush to get machinery in place in offices and on factory floors by the end of the year to qualify for the faster write-off. The surge may be followed by a dip in investment this winter.
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